Trump has signed an order to raise the tariff rate on Canada to 35% from 25%, effective from August 1. According to the White House, goods qualifying under the United States-Mexico-Canada Agreement (USMCA) will continue to be exempt from these tariffs.
This move follows Trump’s disapproval of Canada’s position on Palestinian state recognition. The administration stated it would use all tools to safeguard national security. Countries mentioned in Annex I of the executive order will be subject to the 35% tariffs, while those not included will face a 10% tariff. Furthermore, goods transshipped to circumvent the 35% tariff on Canada will incur a transshipment tariff of 40%.
Currency Market Impacts
With these tariffs taking effect tomorrow, August 1st, we should expect immediate and significant volatility. The most direct impact will be on the currency market, specifically the U.S. dollar versus the Canadian dollar. We anticipate the Canadian dollar, which closed today near 1.38 CAD per USD, will weaken considerably, presenting an opportunity for traders to take long positions on the USD/CAD pair through futures or options.
We are also looking at Canadian equities, which will likely face sharp downward pressure as markets open. Traders should consider buying put options on broad Canadian market ETFs, like the iShares MSCI Canada ETF (EWC), to speculate on a market downturn. This reaction would be consistent with what we observed during the onset of the 2018 steel and aluminum tariff conflict, which saw Canadian stocks fall sharply in the immediate aftermath.
The suddenness of the executive order means implied volatility on Canadian assets will surge. This makes buying volatility an attractive strategy, perhaps using straddles on the most affected Canadian companies or currency futures. Such a position would profit from a large price swing, regardless of the ultimate direction, which is useful given the uncertain political landscape.
Tariff-Impacted Goods
It is crucial to identify which specific goods are not protected by the USMCA, as they will bear the full brunt of the 35% tariff. We are looking at historical friction points like softwood lumber and certain agricultural goods. Statistics Canada’s most recent quarterly report for Q2 2025 indicated that non-USMCA protected goods accounted for over $15 billion in exports to the United States, highlighting a significant and vulnerable segment of the trade relationship.
Finally, we are evaluating the secondary effects on U.S. companies. Firms that rely on non-USMCA Canadian imports will face higher costs, which could negatively impact their upcoming quarterly earnings and stock performance. Conversely, U.S. domestic producers who compete with these Canadian imports may find themselves in a more favorable position.
